IRS Tax Audit Manual for the Tobacco Industry
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Tobacco is deeply rooted in our history. Because the export of tobacco financed shipment of essential goods from England, it became the lifeblood of the early settlers. Tobacco sales continue to play a major role in the U.S.economy. Approximately one-third of the total annual production is exported. Leaf and manufactured product exports have grown since 1988 and now appear to be leveling off.
Generally, imported tobacco is a lower grade than domestic leaf. It is used in the manufacture of generic cigarettes, which, in 1992, were 30 percent of the market. American leaf is used in brand name production. Tobacco is the seventh largest cash crop of the 50 states. One acre produces an average yield of $3,852. In comparison, corn, cotton, and peanuts yield $262, $380, and $691 per acre, respectively.
The tax on tobacco products is now the second largest revenue generated for the U.S. Treasury, exceeded only by excise tax collections from gasoline. Tobacco is the most heavily taxed of any consumer product by percent of retail price. The taxes generated are not only from excise, but from income, employment, property, and sales taxes.
Take a FREE sneak peek into just a few of the aspects that the IRS knows about the Tobacco Industry – you may be surprised!
During the initial stages of gathering information on tobacco growers, a scheme was uncovered through contact with the U.S. Department of Agriculture (USDA). The dealers circumvented the regulatory requirements enabling the farmers to sell tobacco which exceeded their quota. It was discovered that more than 20 million pounds of tobacco (at an average price of $1.70 per pound) were sold through the scheme in 1991 alone.
Examinations of dealers in both districts have resulted in substantial adjustments. Several fraud referrals have been made and two examinations to date have resulted in jeopardy assessments. In spite of the regulatory system of checks and balances, various schemes have been developed.
LEARN FOR YOURSELF THE SCHEMES UNCOVERED BY THE INTERNAL REVENUE SERVICE AUDIT AGENTS – Schemes to Circumvent ASCS’s Quota System Air Pounds Substitution By Dealer Substitution By Farmer Crop Insurance Schemes Crop Shifting Black Market Sale Warehouse Schemes Short Weighing Flaking, Scaling or Pinhooking Gratuities to Buyers and Graders Tax Implications of These Uncovered Schemes.
Most schemes to circumvent the quota system involve payments by cash for goods or services. These payments are generally unsubstantiated by the payer and are usually unreported for tax purposes by the recipient. Dealers who participated in these schemes generally have been found to overstate their cost of goods sold to reflect what it would have been had they purchased tobacco legitimately, rather than reflecting the bargain price they paid for excess production. Dealers also have been found to use structuring arrangements to avoid filing cash transaction reports, Form 8300 and CTR’s, when cashing the checks by warehouses.
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How The IRS Differentiates Tobacco Farmers From Other Farmers?
Farmers who grow tobacco are different from other farmers in several ways. It is those differences that make the use of this training manual useful. Due to the high value of tobacco, both per acre and per pound, and the level of Government regulation of the industry, special problems and opportunities exist. A detailed paper trail is generated for legal sales of tobacco, and complex schemes have developed to facilitate illegal sales.
This training manual will give you a comprehensive look into the history, background and structure of the tobacco industry. This manual is intended to assist the auditor in performing a quality audit of a tobacco farmer.
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TABLE OF CONTENTS
Chapter 1, Overview
History of Tobacco 1-1
Market Structure 1-2
The Major Players 1-2
How The Market Should Work 1-3
Government Regulation of the Tobacco Industry 1-4
Schemes to Circumvent ASCS’s Quota System 1-8
Crop Insurance Schemes 1-8
Warehouse Schemes 1-9
Tax Implications 1-9
Types of Tobacco 1-10
Chapter 2, Farmers
Introduction to Tobacco Farmers 2-1
Audit Steps 2-1
Pre-Audit Analysis 2-1
Sources of Information 2-2
Information Document Request 2-5
Initial Interview 2-7
Tour of the Farm 2-10
Audit Issues/Techniques 2-11
Required Filing Checks 2-11
Income Probes 2-13
Specific Expenses 2-18
Tax Law, Regulations, and Court Cases 2-21
Income/Reconstruction of Income 2-21
Indirect Methods 2-21
Don’t forget – The IRS Tax Audit Manual for the Tobacco Industry is tax deductible as a business expense!